In what showed the limitation of India’s recent retrospective amendments in tax laws concerning indirect transfers abroad of Indian assets, the Andhra Pradesh High Court on Friday ruled that notwithstanding the bolstered law, French drug multinational Sanofi need not pay capital gains tax in India for its acquisition of Hyderabad-based vaccine manufacturer Shantha Biotech in 2009. The court said Sanofi, which is liable to pay tax in France for the R3,800-crore deal, won’t have to pay tax in India also thanks to the protection afforded by the Indo-French tax treaty.
The Indian tax authorities had asked Sanofi to pay over R650 crore as capital gains tax.
Sanofi Aventis, as it was then known, had bought out Shantha Biotechnics through acquisition of ShanH, which held a majority stake in Shantha. ShanH, the French subsidiary of Merieux Alliance, had earlier bought out Shantha in November 2008. The court held that ShanH was a company with commercial substance and so the deal was eligible for treaty protection.
The government is likely to challenge the order in the Supreme Court.
The HC ruling have positive implications for at least a couple of similar cross-border deals where the buyers face Indian tax demands, including British brewing giant SAB Miller which bought out Foster’s Group for $10.2 billion in September 2011. SAB Miller claims that the transaction enjoyed protection of the India-Australia double taxation avoidance agreement (DTAA).
Rajiv Chug, partner, direct tax, Ernst & Young said: “As long as the entity in the treaty-partner country has commercial substance and is not a sham entity or mere nominee, the treaty protection is bound to be there.”
However, the high court’s ruling on Friday will have little effect on the high-profile Vodafone case, as the relevant deal did not enjoy any duty protection. The government is apparently having a rethink on the retrospective amendments of Section 9 of the Income Tax Act meant to tax deals similar to Vodafone involving offshore transfer of shares, which have derived value substantially from assets located in India.
Separately, informal talks are on with Vodafone on reaching an amicable settlement over the R11,000-crore tax demand raised. As the law stands today, the amendment covers all such offshore transactions.
The Parthasarathi Shome committee has voted against retrospective applicability of the law on indirect transfer of assets brought in through the Finance Act, 2012, but proposed some clarifications that would substantially reduce the irritant nature of the law, regardless of